UPDATE 2-Provident Financial shares soar as capital raising seen as first step to recovery

Feb 27 (Reuters) - Shares in troubled Provident Financial soared by more than 80 percent on Tuesday after the British sub-prime lender announced a 331 million pound ($462 mln) share sale that will increase its capital by more than a third.

The rights issue is the first sign of a long-awaited turnaround in the company which lost 70 percent of its value last year when it swung into the red after two profit warnings, that prompted the departure of CEO Peter Crook and the suspension of its dividend. It has also been under investigation by Britain’s financial watchdog.

Provident said the rights issue was backed by its two largest shareholders Invesco Asset Management and Woodford Investment Management, and would meet the costs of resolving a probe by the Financial Conduct Authority (FCA) into its Vanquis Bank unit.

It would also secure the company’s capital position, maintain its “investment grade rating” and re-establish normal access to funding from the bank and debt capital markets.

Shares in the firm, which at the start of Tuesday’s trade was worth about 871 million pounds, rose as much as 87.6 percent to 1104 pence - their highest level since the second profit warning last August. They were up 75 percent at 1029 pence at 1040 GMT.

The lender said it had reached a settlement with the FCA resulting in a fine of 2 million pounds and compensation payments of 127.1 million pounds and other estimated costs of 43 million pounds.

“In 2018, the group will continue to rebuild trust with our customers, regulators, shareholders and employees,” Chief Executive Malcolm Le May said.

RESTRUCTURING

Provident has been trying to reorganise a business that has traditionally relied on self-employed agents offering high-interest loans of between 100 and 1,000 pounds and collecting repayments through weekly household visits.

But it had been unable to recruit enough people for its plan to replace external agents with direct employees.

Provident also said that Moneybarn, its car and van financing arm, continued to cooperate with the regulator in a separate investigation, which it estimated could eventually cost the company 20 million pounds.

The investigation is focused on how Moneybarn assesses whether customers can afford to take on credit and how it deals with borrowers who cannot repay loans.

Provident, which was established in 1880 and provided loans through the Wall Street crash of 1929 and both World Wars, also reported a pretax loss of 123 million pounds for the year ended Dec. 31, compared with a pretax profit of 343.9 million pounds a year earlier.

Provident also said its beleaguered home credit business had entered 2018 with 527,000 active customers and receivables of 352.2 million pounds, consistent with its recovery plan.

Le May said he hoped the unit would break even on an annualised run rate basis by the second half of 2018.

The group targets a return on assets of about 10 percent after the rights issue and the home credit unit returns to profitability in 2019, and a progressive dividend policy with coverage of at least 1.4 times from 2019 onwards.